Commentary: Canada in an advanced stage of real estate dependency

Commentary: Canada in an advanced stage of real estate dependency

Recent events have served to emphasize the central role that the Canadian real estate sector now plays in the national economy—a set-up that might prove to be incredibly risky in the long run, according to two industry observers.

“Measures of housing’s contribution to the economy are imprecise, but estimates largely put the direct contribution in excess of 20 per cent,” the duo wrote. “The real estate industry, residential construction, financial and legal services generated a combined 0.5 per cent increase in [GDP] output, the biggest one-month gain since 2014. Without those, the overall economy would have contracted slightly in February.”

The analysis also pointed at Ontario’s introduction of its foreign buyers’ tax as a step that came at exactly the right moment for the province.

“[Last week], the Ontario government released a budget that projects land transfer taxes will surpass $3 billion in the current fiscal year, from $1.8 billion three years ago. For the province, it’s the difference between a balanced budget and a deficit,” Hertzberg and Argitis said.

Together, these developments point to a dramatic shift from oil to real estate as a prime mover in the national economy—a conclusion supported by Mark Chandler, head of fixed-income research at RBC Capital Markets in Toronto.

“You don’t need a collapse in house prices, you don’t need housing starts to be cut in half for weaker real estate sector to have a significant effect on GDP and incomes,” Chandler said recently, adding that even just a 10 per cent drop in national home prices would be enough to tear off a percentage point from growth.